How to make economics a relevant science again

Economists are struggling to explain recent productivity developments, the implications of rising inequality, the impact of persistently negative interest rates in the eurozone … and the sudden slowdown in European growth …

None of this is a huge surprise, given the profession’s embrace of simplistic theoretical assumptions and excessive reliance on mathematical techniques that prize elegance over real-world applicability …

All of this should tell economists that there is plenty of room for improvement, and that they need to expand the scope of their analysis to take into account human interactions, distributional effects, financial-economic feedback mechanisms, and technological change. But this cannot just be about devising new analytical models within the field; economists also must incorporate insights from other disciplines that the profession has overlooked.

A discipline long dominated by “high priests” must now adopt a more open mindset … Without significant adjustments, mainstream economics will remain two steps behind changing realities on the ground, and economists will be risking a further loss of credibility and influence. In an era of concern about climate change, political upheavals and technological disruption, the shortcomings of mainstream economics must be addressed posthaste.

Yes indeed — what shall mainstream economists do when the modelling​ assumptions made are shown to be harmful and not even remotely matching reality?

What shall mainstream economists do when university students all over Europe and US are increasingly beginning to question if the kind of economics they are taught — mainstream neoclassical economics — really is of any value — and some even question if economics really is a science at all?

How do we re-establish credence and trust in economics as a science?

I think five changes are absolutely decisive if we want to rethink economics and make it a truly pluralist, relevant and realist science:

(1) Stop pretending that we have exact and rigorous answers on everything. Because we don’t. We build models and theories and tell people that we can calculate and foresee the future. But we do this based on mathematical and statistical assumptions that often have little or nothing to do with reality. By pretending that there is no really important difference between model and reality we lull people into thinking that we have things under control. We haven’t! This false feeling of security was one of the factors that contributed to the financial crisis of 2008.

(2) Stop the childish and exaggerated belief in mathematics giving answers to all important economic questions. Mathematics gives exact answers to exact questions. But the relevant and interesting questions we face in the economic realm are rarely of that kind. Questions like “Is 2 + 2 = 4?” are never posed in real economies. Instead of a fundamentally misplaced reliance on abstract mathematical-deductive-axiomatic models having anything of substance to contribute to our knowledge of real economies, it would be far better if we pursued “thicker” models and relevant empirical studies and observations.

(3) Stop pretending that there are laws in economics. There are no universal laws in economics. Economies are not like planetary systems or physics labs. The most we can aspire to in real economies is establishing possible tendencies with varying degrees of generalizability.

(4) Stop treating other social sciences as poor relations. Economics has long suffered from hubris. A more broad-minded and multifarious science would enrich today’s altogether too autistic economics.

(5) Stop building models and making forecasts of the future based on totally unreal microfounded macromodels with intertemporally optimizing robot-like representative actors equipped with rational expectations. This is pure nonsense. We have to build our models on assumptions that are not so blatantly in contradiction to reality. Assuming that people are green and come from Mars is not a good – not even as a “successive approximation” – modelling​ strategy.

Economics departments should ideally be closed down. Micro-economics as a field should be separated and given to psychology departments (for the household) and business schools (for the firm). Macro-economics should be handled by departments that can study capitalism – political science, sociology, history. This way we have importantly separated micro and macro. Macro and studies of capitalism should be closer to political economy, political science and political philosophy than to microeconomics. In so far as they need to be joined, this should be undertaken in an interdisciplinary way across departments.

Of course this won’t happen. With the increasing privatisation of universities and reliance on tuition fees, economics departments are relatively cheap to run and are money earners. With ‘Nobel’ prizes, it helps raise them in world league rankings in the chase for high fee paying students worldwide.

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